Taxation planning concept

Welcome to taxation in Kenya, in this article we highlight the basics of taxation and how you can avoid over-taxation on your hard-earned money. Since the beginning of civilization, paying taxes to governments or officials has been a fundamental practice and nowadays it is nearly impossible for individuals to escape taxation in one form or another.

In practically every nation, taxes are a means of funding government operations. According to the International Centre for Tax and Development (ICTD), tax receipts account for 80% of all government spending in half of the world’s nations. Governmental entities can raise tax rates through modifying tax laws and broadening revenue bases.

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The primary purpose of the money raised is to assist the taxpayers, hence the particular benefit obtained is unrelated to the particular payment. There are a few exceptions, such as payroll taxes, where the taxpayer will gain immediate access to retirement and health benefits.

Between developing and developed nations, there are large differences in taxation methods. Because wealthy countries have more effective systems for ensuring that taxes are paid and for collecting unpaid taxes, they collect higher tax revenues than emerging nations.

However, the political system’s competence has a direct impact on each of these characteristics. In contrast to poorer nations, which mainly rely on trade and consumer taxes to realize the majority of their national production, industrialized countries often rely more on income taxation.

Taxation’s goals and justifications

To finance governmental expenses, taxation serves its most fundamental purpose. Taxes have been justified and explained in a variety of ways throughout history. Early taxes supported the ruling classes by funding their armies and fortifications. The power to tax frequently derives from heavenly or supranational rights

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Taxation Methods

The various charges that the government imposes on citizens include the following:

Revenue Taxes

Taxes on an individual’s overall financial income, including their wages, assets, and salary, are known as income taxes. The majority of income taxes rise along with the taxpayer’s income. In other words, wealthier earnings pay more in taxes than lower earners. This also goes under the name of progressive taxation

 Business taxes

Income from businesses is subject to corporate income tax. By raising prices and offering low wages, businesses spread the cost of corporate tax among themselves, their clients, and their staff. Most governments impose a corporation tax rate on enterprises that is below 30% to promote economic growth.

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Kenyan Revenue Authority Itax Portal

Taxes on wages (PAYE)

Employees are subject to payroll taxes, which are levies used to pay for social security funds. such as NSSF and NHIF. Usually, the payroll tax also known as PAYE (Pay as You Earn) is automatically subtracted from the employee’s pay and paid by the employer on their behalf.

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 Taxes on Capital Gains

Capital assets, which include investments like stocks, homes, bonds, vehicles, and jewelry, are subject to capital gains taxes. Capital gain describes the growth in value of an asset, such as rising stock prices.

Therefore, tax is paid on the profit made when a person benefits from a capital gain.

Real Estate taxes

Property taxes are often levied on tangible assets like land and buildings. They are the main source of funding for regional and national administrations. Over 70% of local tax income comes from property taxes. Key public services including fire departments, schools, roads, security, and emergency medical care are funded in part by property taxes.

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Tax return financial form concept by Rawpixel via Freepik

Tax Classifications

Taxes are categorized according to a variety of factors, including the method of payment, the person who must pay the tax, and the degree of burden shifting.

Direct taxes

Individuals are liable to direct taxes, which are assessed according to the taxpayer’s net worth, expenses, or personal net income. Taxes on net worth are calculated based on an individual’s total assets minus their total obligations, whereas expenditure taxes are levied on income that is not used for savings.

Indirect Taxes

Taxes that are levied on transactions like imports and exports, as well as the creation and consumption of products and services, are known as indirect taxes. Value-added taxes, business taxes, manufacturing taxes, and customs taxes on import charges are a few examples.

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